India Ratings bearish on construction sector for H213

India Ratings & Research (Ind-Ra) has maintained a negative outlook on the Indian construction sector for the second half of 2013 (H213). This is in view of the continued execution and liquidity challenges facing the sector, identified as major constraints in the beginning of the year. The impact of these challenges is likely to intensify in the near term.

Ind-Ra observes that construction companies have concentrated more on the execution of existing orders than over-bidding. This is reflected in better top-line growth during H2FY13 than in H2FY12 along with a decline in the order book position. However, delays in obtaining statutory clearances and increasing working capital needs continue to put pressure on the financial profile of the companies in this sector. This has been compounded by the inability to pass on input cost increases which has resulted in a fall in EBITDA margins, again a trend that is likely to continue in the near term.

Working capital cycles continue to be stretched on account of delays in the certification of works completed by construction companies. Higher debts for executing large order books and to fund working capital along with high interest rates have led to further deterioration of the credit metrics of the companies. Given the downward pressure on margins and higher requirements for funds, the agency expects that credit metrics may worsen further in the near term.

Ind-Ra believes that faster order execution and liquidity easing are key to a stable outlook. Better availability of funds and governmental policy actions addressing the factors hindering speedy execution of works would have a positive impact on the industry. Restricting order books to a manageable level, especially by fund starved companies, can lead to liquidity easing and improvements in credit metrics.

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